The SEC's focus on continuation vehicles—getting ahead of regulatory scrutiny

SEC examination highlights growing regulatory focus on continuation funds 5 min read

The US Securities and Exchange Commission (the SEC) is actively examining GP-led continuation vehicle (CV) transactions, with a focus on conflicts of interest, valuation integrity and investor disclosure—which may be further motivation for the Australian Securities and Investments Commission (ASIC) to do the same.

In this Insight, we explain the consequences for Australian sponsors and investors, and actions you can be taking now to stay ahead.

Key takeaways

• At a time when the Institutional Limited Partners Association has just published updated guidance on CVs, the SEC has commenced examinations of investment advisers involved in CV transactions, with a particular focus on conflicts management, valuation practices and investor (LP) disclosure.
• There is a relatively homogenous international market for fund terms, and ASIC has a tendency to take inspiration from the approach of comparable regulators such as the SEC and the UK's Financial Conduct Authority (the FCA). In addition, ASIC's   ongoing review into private markets  has a particular focus on conflicts management, valuations practices and investor disclosure. Therefore, Australian managers should consider using the SEC's review as a prompt to revisit their own governance frameworks, LP advisory committee (LPAC) processes and disclosure practices in connection with CV transactions.

Background

Once regarded as a relatively niche liquidity solution, CVs have become an increasingly important feature of the private capital landscape in recent years. A CV allows sponsors to transfer one or more assets from a maturing fund into a new vehicle. In such a transaction, investors in the selling fund typically have the option to exit their exposure to the transferred asset(s) (ie because the existing fund in which they are invested sells to the CV) or to roll their exposure into the new CV.

A range of factors is driving the adoption of CVs. Some commentators have pointed to  a sustained flattening of the initial public offering market and subdued trading conditions arising from geopolitical instability, renewed inflationary pressure and rising interest rates impacting portfolio company valuations, which have resulted in a backlog of exits.  As the Australian Investment Council indicated in its 2026 private capital yearbook, 'the backlog of exits is the single most pressing challenge spanning every asset class'.  This is coupled with pressure from investors on sponsors to increase the ratio of distributions to paid-in capital, particularly in the context of sponsors seeking to raise successor funds.

These are, no doubt, relevant factors. However, as we have previously examined (New guidance for continuation fund transactions), when done correctly and with the right asset or assets — there are clear examples of this among the small number of high-profile CVs raised in Australia to date — given closed ended funds are required to sell investments within a particular timeframe, CVs allow a sponsor and its investors to benefit from continued upside on prize assets by rolling their investment into a new vehicle.  

As these transactions become more common and more sophisticated, they continue to attract closer regulatory attention.

What is the SEC examining?

The SEC's review is centred on three related issues, each of which goes to the integrity of CV transaction processes.

The first is conflicts of interest. In a CV transaction, the sponsor acts as both seller (in connection with the existing fund) and buyer (regarding the acquiring vehicle), and the transaction can have material fee and other impacts for the sponsor on both sides. As a result, CV transactions will typically require the approval of the selling fund's LPAC, either under general conflict provisions or, increasingly, under provisions dealing specifically with CVs. The SEC is closely examining whether the conflicts that arise as a result are being properly identified, disclosed and managed—including whether independent advisers are being used and fairness opinions are being issued. Independent research covering approximately 150 CV transactions between 2021 and 2025 found that around 59% closed at a discount to net asset value, with an average discount of approximately 8%. That same research report also flagged that deferred consideration provisions, present in roughly 15% of deals, can flatter reported returns in ways that headline pricing figures may not capture.

An additional area of focus is valuation practices. Because the transfer price determines whether non-rolling investors in the selling fund receive fair value for their interests, the SEC is examining whether such prices are being determined in a manner consistent with established valuation policies.  In ILPA's draft guidance, there is an emphasis on enhanced disclosure in relation to valuation practices - if valuations presented as part of the CV election materials or related disclosures depart from the existing fund’s valuation policy (or are inconsistent with independent pricing or valuation), it is ILPA's expectation that sponsors should disclose and explain this to existing LPs.

Beyond conflicts management and valuation practices, the SEC is examining investor disclosure and consent, with a focus on the quality of information provided to investors when deciding whether to exit or roll into a CV. That includes whether LPACs are properly constituted, sufficiently independent and given enough information to exercise meaningful oversight before approving the transaction.

What does this mean for Australian private market participants?

ASIC has consistently looked to the enforcement priorities of overseas regulators, particularly the SEC and the FCA, when shaping its own supervisory approach. As such, we anticipate that ASIC will take a close interest in the results of SEC's investigation—particularly as its focal point aligns with themes ASIC has already identified as supervisory priorities, including conflicts management, governance within fund structures, valuation of unlisted assets, and the quality (and equality) of disclosure to investors. ASIC is currently engaging with industry associations to develop guidance for managing conflicts of interest, drawing on its recent updates to RG 181  AFS licensing: Managing conflicts of interest.

Though the SEC's investigation is ongoing and its findings will shape the appropriate course of action, it will be prudent for sponsors to consider doing the following:

• reviewing conflicts management frameworks to ensure they appropriately address conflicts in CV secondary transactions;
• ensuring any LPAC is adequately informed and empowered to scrutinise CV proposals, including whether it should be supported by independent advisers for significant transactions (as is now proposed in ILPA's revised draft guidance on continuation vehicles)¹;
• where the price for the proposed disposal is not supported by a robust third-party process, appointing an independent third-party valuer or obtaining a fairness opinion from an unaffiliated financial adviser for any CV transaction, and providing such valuation / opinion to the LPAC / investors in the selling fund; and
• providing investors in the selling fund — in advance of any deadline for deciding whether to roll their interest into the CV — with comprehensive disclosure, covering the rationale behind a transaction, identified conflicts, the pricing basis, the new vehicle's key terms, and any material differences in rights or fees.

The SEC's focus on CVs is a timely reminder that regulators increasingly expect governance arrangements to evolve alongside market practice. For Australian sponsors and investors, the message is less about responding to a specific SEC initiative and more about ensuring governance, valuation processes and investor disclosure remain fit for purpose, and capable of withstanding increased regulatory scrutiny.